05/11/2015

Frivolous Suits: False Claims Act Retaliation Doesn’t Pay, It Costs

Terry Jacobs stole trade secrets from his prior employer, Lambda Research, and was ordered to pay $9.4 million in damages when Lambda sued him. The story doesn’t end there. Two months later, Jacobs sued Lambda under the False Claims Act, alleging that his former employer had defrauded the Navy. The timing is suspect, n’est-ce pas? The trial court, understandably concerned that Jacobs’ suit was in retaliation for Lambda’s, warned Jacobs (and his lawyer) that if they proceeded and could not present evidence to support Jacobs’ claims, they would be sanctioned for filing a frivolous lawsuit. Jacobs persisted, no evidence surfaced, and the court granted summary judgment to Lambda and imposed sanctions on Jacobs and his lawyer. Incredibly, Jacobs appealed. Jacobs v. Lambda Research Inc. et al, No. 14-3705, Sixth Circuit (May 1, 2015).

To give our readers a clear picture of how stunningly bold Jacobs and his lawyer were, we need look no further than the trial court’s own language:

First, during a hearing, the court warned Jacobs and his attorney that "if you are using this [lawsuit] to vent some spleen against these folks, you’re going to end up getting sanctioned."

Second, when counsel tried to assure the court that the lawsuit was legitimate, the court reiterated its warning: "Now, I want to caution you again. If this is a frivolous suit …, you’re subject to be sanctioned. Rule 11 is there and it’s there for a reason[.] . . . If it turns out that [this case] is frivolous or as soon as you discover that it is frivolous or without merit . . . you should dismiss it."

Third, in the realm of believe it or not, the court repeated its warning for a third time, this time in its written order: "[S]hould it become apparent that the claims herein are without evidentiary support or are being pursued for an improper purpose, [Jacobs] is under a duty to dismiss them voluntarily."

The court was not a lone voice. Lambda itself sent Jacobs’ counsel a letter reminding him of the court’s warnings and issuing its own warning: if counsel failed to dismiss Jacobs’ suit voluntarily, Lambda would seek sanctions directly against counsel. Jacobs did not voluntary dismiss his suit, Lambda moved for summary judgment, and the trail court granted the motion stating "the claims alleged in this case are frivolous and … Jacobs brought this action . . . as retaliation for Lambda’s successful state court action . . . ."

On appeal the Sixth Circuit agreed with the trail court – Jacobs presented no evidence that Lambda ever told the Navy anything constituting a false claim. And that’s not all. The court found the appeal to be frivolous as "it is obviously without merit and is prosecuted for delay, harassment, or other improper purposes" and, accordingly, ordered Jacobs’ counsel to show cause why he should not be sanctioned.

Take away: It seems like we see an endless succession of successful False Claims Act cases. But keep in mind that not all FCA cases present valid claims. Work with counsel to identify and defend against the frivolous ones, as Lambda did here.